Long-term leasing is catching on. Yes, the income tax incentives that allow farmers to get paid the land rental and value of their entitlements tax-free are a factor. However, it is also due to farmers realising that they can make more by doing less.
I have never got more calls from farmers looking to lease out land long-term than I have this spring. Interestingly, many of them are from farmers who are not looking to retire.
They are active farmers who are looking to lease land they own away from their home farm – the outfarm that they used to drive to every day to check the cattle or where they grew tillage that has lost money in the last few years.
Lease
When they took a cold hard look at the return, they decided that they would make more money and save time by leasing it out for five years or more. If a farmer gets €370/ha (€150/acre) for rent and has entitlements worth €250/ha, he would get €620/ha tax free.
If he was paying the high rate of income tax (40%) and USC, he would have to make a net profit of €920/ha (excluding entitlements) to get the same amount into his hand.
In some cases the same farmer was looking to rent land closer to his or her home farm. I have even come across some cases where farmers who were passing each other on the road every day to go and herd their stock realised they could swap the land parcels by long-term leasing from each other. This saves the travel and gives them the advantage of consolidating their farms and benefiting from the tax-free lease.
The three Ps of
long-term leasing
There are three Ps to long term leasing and price should be the last one to consider. The first and most important one is person and the second is practice.
Person
Getting the right person is the key to successful land leasing. There is no point putting price first. Some farmers are willing to give anything that is asked knowing that they are not going to pay. At worst they will treat your land poorly and reduce the value of your asset when they do finally leave. With the tax-free incentive on the line farmers should do their homework. Don’t be afraid to check with landowners from whom the farmer has leased land before. It they haven’t leased before, don’t be afraid to visit their farm and ask them for references or to talk to their accountant. It is about confirming that they will look after the land and pay on time. Once you have the right person, long-term leasing is the kindest thing you can do for land. Conacre farmers who are not sure they will have the land next year will do as little as possible. The land will get depleted and run down. Even where farmers have land on continuous conacre they will be slow to invest in the fundamentals such as lime, P and K, maintaining drains and good fencing as they might not get it the following year. Having land under long-term lease for five years or more allows farmers to make decisions to reseed, lime and fence properly as they can get a return on the investment. It certainly gives more security when planning investment in your overall business.
Practice
Practice is covered within the lease. It will set out what both parties expect from each other. For the owner, it sets out the term and when payment is expected, what the land can be used for and how it should be returned. Treatment of basic payment should also be included. There are template lease agreements such as the IFA master lease that is a good starting point. The lease will be signed by both parties, stamped by Revenue to ensure you get tax relief and also must be registered with the Property Registration authority by the farmer who is leasing. It includes a separate renunciation clause signed by both parties where the tenant waives any rights under the Landlord Tenancy Act.
Price
The highest price is not always the best one. The first question most farmers ask is what price should they ask for their land? It is always strange given that they own the land and I have never seen it. They usually know the answer to the question. They are asking it in the hope I will say higher to justify them asking more. In some cases there are a number of farmers interested in taking the land on long-term lease so they hope they can start a bidding match.
Farmers’ leasing jumps 27%
In the Basic Payment Scheme application form, farmers must identify if they own, rent or lease each parcel of land. In 2014, 18,520 farmers identified that they had at least one leased-in parcel. In 2015 this increased to 23,439 farmers. That’s a 27% increase in just one year. Nearly one in five farmers leased land in 2015, a figure that will rise.
Sharing risk and reward
One of the more interesting conversations I have had around price was with one landowner who was looking to link the yearly lease price with the price of grain. To me, it makes perfect sense. Renting or leasing land is all about risk and reward for both the owner and the farmer.
Currently, most of the risk is taken by the farmer, while the main risk for the landowner is not getting paid. If the yearly lease was linked to grain prices in a poor price year, the landowner would get less but the risk of not getting paid would also be much less.
The big benefit for the landowner is if the price of grain goes up they share in some of the upside by getting a much higher rental price. This would reflect the profitability in the actual year that it happens. Normally if grain prices are high in one year, conacre prices are pushed up the following year regardless of the final price. This increases the risk to both sides. The actual payment could be from 0.8t to 1.2t of grain depending on land quality.
The farmer was looking for the right index on which to base the price. The Glanbia or Dairygold green grain price is probably the most developed base link at this stage. The same thinking could also work for milk price. The indexes such as the co-op base price would be easier to link leasing to. I have actually seen leases where the owner wants a higher lease price if prices go over say 35c/l.
This is fine, but to work it has to work both ways. If the price drops to current levels the landowner would have to take a lower price. Again, they have to share in the rewards. Doing so will reduce the main risk of not getting paid in a period of poor prices. It is another tool against price volatility. As the leasing market develops, we will hopefully see what really is a type of share-farming relationship develop.
Guidelines
Teagasc published a good reference guide titled Guidelines to Long-term Leasing. It can be found on the Teagasc website. The key points it sets out are:
Why landowners (lessors) should consider long-term land leasing?
Enhanced income tax relief incentives.Stable long-term income from farm assetsProviding an opportunity for leasee to improve fertility and land quality.Qualify for retirement relief on transfer or sale of the farm.No identified successor.Successors not yet ready to farm.Looking for a stable long-term lessee.Retiring from farming.Why active farmers (lessee) should consider long-term land leasing?
Security of tenure.Enables longer-term planning of the farm business.May provide opportunities for expansion or change of enterprise.Provides the opportunity to invest and improve the land.Farm buildings may come with the land that will reduce capital.Investment in housing, slurry and silage storage facilities.The land is more productive with investmentMore cost-effective than purchasing land.50% clawback – using a sledgehammer to crack a nut
The best option for farmers is to lease their entitlements with land under a long-term lease. The reason is the value can be incorporated into the tax-free threshold. The thresholds were actually increased in the past to allow for this. It is an example of how policies implemented can work to encourage landowners to long-term lease to the benefit of the active farmer. There are other examples that work against this – such as the introduction of clawback to sales of entitlements without land.
The introduction of a 50% clawback happened when applications were flooding in for the national reserve last year. There were fears that some were taking advantage to create false situations for one year to allow them to benefit from the national reserve. The actual problem was that there was nothing in the legislation to stop those successfully selling or leasing entitlements from 2016 on. In the past, when a farmer received entitlements to the national reserve they were forced to farm them for five years. If they did not use the entitlements, they reverted back to the national reserve. It was a sensible approach, but was dropped in the last CAP round. The clawback was the only option open to the Department and they set it at the maximum of 50%.
Clawback on entitlements are not new. In December 2005, clawback on sale of entitlements without lands was set at 30%. The maximum provided for in EU regulations at the time was 50%. In addition, the sale of entitlements with lands where part of the holding is sold was 5%, while the sale with an entire holding was 2.5%. Interestingly, there was no clawback where the sale of entitlements (with or without lands) was to a qualified new entrant. So while the clawback did raise funds, it gave a leg-up to new entrants without the need to go to the national reserve.
Under the current CAP, there is an option to lease entitlements without land. This is welcome in that it gives more flexibility to farmers. It is especially important now that the “use it or lose it” rules have tightened. From this year on if a farmer does not submit enough hectares to claim all his/her entitlements in one of any two years they will lose the unclaimed ones to the national reserve. For example, if a farmer owned 40 entitlements but only submitted 35ha in 2016 and 2017 they would lose five entitlements. The only option would be to rent an additional 5ha (even if they didn’t want to), lease them out or sell them. In the old system, the farmer would never lose them due to the rotation of entitlements.
Leasing without land is a useful option. The problem is that the introduction of a 50% clawback on the sale of entitlements without land means it will be abused. It was never meant to facilitate a sofa farmer getting a continuous income from the entitlements and continuing to own them. Active farmers with no entitlements or those who lease in additional land will be forced to hand over between 30% and 70% of the value of entitlements to the owner each year to lease entitlements. In the past they were able to buy the entitlements from one to 2.5 times the value. The large clawback has ensured there will be very few entitlements to be sold. Any farmer thinking of selling is quickly put off when he finds out about the clawback. Most owners are leasing in the hope that the clawback will be removed in future years,
It is important to put the transfer and trading of entitlements in context. According to Department figures (see graphic) the number of entitlements sold when the clawback was introduced in 2006 was just 9,619. However, even when the clawback was taken off, the numbers settled at around 35,000 between 2011 and 2013. That’s just 0.8% of all entitlements. Interestingly, the figure jumped nearly threefold to over 100,000 in 2014. This is because farmers who did not farm in 2013 were forced to sell them. The number of entitlements leased grew steadily from 2006 and reached 76,890 in 2013. That was twice as many as were sold that year, but still just 1.7% of all entitlements. In 2014, the number of entitlements leased dropped to just 26,869 as farmers either sold them or held on to them themselves to increase the value of their pot. The number of entitlements that were transferred by gift of inheritance was between 65,000 and 85,000. There was a jump in 2014 before the changeover to the new system.
The clawback should be reduced and ideally phased out over two years. Otherwise, it just encourages farmers not to sell to the long-term determinant of active farmers.
Long-term leasing is catching on. Yes, the income tax incentives that allow farmers to get paid the land rental and value of their entitlements tax-free are a factor. However, it is also due to farmers realising that they can make more by doing less.
I have never got more calls from farmers looking to lease out land long-term than I have this spring. Interestingly, many of them are from farmers who are not looking to retire.
They are active farmers who are looking to lease land they own away from their home farm – the outfarm that they used to drive to every day to check the cattle or where they grew tillage that has lost money in the last few years.
Lease
When they took a cold hard look at the return, they decided that they would make more money and save time by leasing it out for five years or more. If a farmer gets €370/ha (€150/acre) for rent and has entitlements worth €250/ha, he would get €620/ha tax free.
If he was paying the high rate of income tax (40%) and USC, he would have to make a net profit of €920/ha (excluding entitlements) to get the same amount into his hand.
In some cases the same farmer was looking to rent land closer to his or her home farm. I have even come across some cases where farmers who were passing each other on the road every day to go and herd their stock realised they could swap the land parcels by long-term leasing from each other. This saves the travel and gives them the advantage of consolidating their farms and benefiting from the tax-free lease.
The three Ps of
long-term leasing
There are three Ps to long term leasing and price should be the last one to consider. The first and most important one is person and the second is practice.
Person
Getting the right person is the key to successful land leasing. There is no point putting price first. Some farmers are willing to give anything that is asked knowing that they are not going to pay. At worst they will treat your land poorly and reduce the value of your asset when they do finally leave. With the tax-free incentive on the line farmers should do their homework. Don’t be afraid to check with landowners from whom the farmer has leased land before. It they haven’t leased before, don’t be afraid to visit their farm and ask them for references or to talk to their accountant. It is about confirming that they will look after the land and pay on time. Once you have the right person, long-term leasing is the kindest thing you can do for land. Conacre farmers who are not sure they will have the land next year will do as little as possible. The land will get depleted and run down. Even where farmers have land on continuous conacre they will be slow to invest in the fundamentals such as lime, P and K, maintaining drains and good fencing as they might not get it the following year. Having land under long-term lease for five years or more allows farmers to make decisions to reseed, lime and fence properly as they can get a return on the investment. It certainly gives more security when planning investment in your overall business.
Practice
Practice is covered within the lease. It will set out what both parties expect from each other. For the owner, it sets out the term and when payment is expected, what the land can be used for and how it should be returned. Treatment of basic payment should also be included. There are template lease agreements such as the IFA master lease that is a good starting point. The lease will be signed by both parties, stamped by Revenue to ensure you get tax relief and also must be registered with the Property Registration authority by the farmer who is leasing. It includes a separate renunciation clause signed by both parties where the tenant waives any rights under the Landlord Tenancy Act.
Price
The highest price is not always the best one. The first question most farmers ask is what price should they ask for their land? It is always strange given that they own the land and I have never seen it. They usually know the answer to the question. They are asking it in the hope I will say higher to justify them asking more. In some cases there are a number of farmers interested in taking the land on long-term lease so they hope they can start a bidding match.
Farmers’ leasing jumps 27%
In the Basic Payment Scheme application form, farmers must identify if they own, rent or lease each parcel of land. In 2014, 18,520 farmers identified that they had at least one leased-in parcel. In 2015 this increased to 23,439 farmers. That’s a 27% increase in just one year. Nearly one in five farmers leased land in 2015, a figure that will rise.
Sharing risk and reward
One of the more interesting conversations I have had around price was with one landowner who was looking to link the yearly lease price with the price of grain. To me, it makes perfect sense. Renting or leasing land is all about risk and reward for both the owner and the farmer.
Currently, most of the risk is taken by the farmer, while the main risk for the landowner is not getting paid. If the yearly lease was linked to grain prices in a poor price year, the landowner would get less but the risk of not getting paid would also be much less.
The big benefit for the landowner is if the price of grain goes up they share in some of the upside by getting a much higher rental price. This would reflect the profitability in the actual year that it happens. Normally if grain prices are high in one year, conacre prices are pushed up the following year regardless of the final price. This increases the risk to both sides. The actual payment could be from 0.8t to 1.2t of grain depending on land quality.
The farmer was looking for the right index on which to base the price. The Glanbia or Dairygold green grain price is probably the most developed base link at this stage. The same thinking could also work for milk price. The indexes such as the co-op base price would be easier to link leasing to. I have actually seen leases where the owner wants a higher lease price if prices go over say 35c/l.
This is fine, but to work it has to work both ways. If the price drops to current levels the landowner would have to take a lower price. Again, they have to share in the rewards. Doing so will reduce the main risk of not getting paid in a period of poor prices. It is another tool against price volatility. As the leasing market develops, we will hopefully see what really is a type of share-farming relationship develop.
Guidelines
Teagasc published a good reference guide titled Guidelines to Long-term Leasing. It can be found on the Teagasc website. The key points it sets out are:
Why landowners (lessors) should consider long-term land leasing?
Enhanced income tax relief incentives.Stable long-term income from farm assetsProviding an opportunity for leasee to improve fertility and land quality.Qualify for retirement relief on transfer or sale of the farm.No identified successor.Successors not yet ready to farm.Looking for a stable long-term lessee.Retiring from farming.Why active farmers (lessee) should consider long-term land leasing?
Security of tenure.Enables longer-term planning of the farm business.May provide opportunities for expansion or change of enterprise.Provides the opportunity to invest and improve the land.Farm buildings may come with the land that will reduce capital.Investment in housing, slurry and silage storage facilities.The land is more productive with investmentMore cost-effective than purchasing land.50% clawback – using a sledgehammer to crack a nut
The best option for farmers is to lease their entitlements with land under a long-term lease. The reason is the value can be incorporated into the tax-free threshold. The thresholds were actually increased in the past to allow for this. It is an example of how policies implemented can work to encourage landowners to long-term lease to the benefit of the active farmer. There are other examples that work against this – such as the introduction of clawback to sales of entitlements without land.
The introduction of a 50% clawback happened when applications were flooding in for the national reserve last year. There were fears that some were taking advantage to create false situations for one year to allow them to benefit from the national reserve. The actual problem was that there was nothing in the legislation to stop those successfully selling or leasing entitlements from 2016 on. In the past, when a farmer received entitlements to the national reserve they were forced to farm them for five years. If they did not use the entitlements, they reverted back to the national reserve. It was a sensible approach, but was dropped in the last CAP round. The clawback was the only option open to the Department and they set it at the maximum of 50%.
Clawback on entitlements are not new. In December 2005, clawback on sale of entitlements without lands was set at 30%. The maximum provided for in EU regulations at the time was 50%. In addition, the sale of entitlements with lands where part of the holding is sold was 5%, while the sale with an entire holding was 2.5%. Interestingly, there was no clawback where the sale of entitlements (with or without lands) was to a qualified new entrant. So while the clawback did raise funds, it gave a leg-up to new entrants without the need to go to the national reserve.
Under the current CAP, there is an option to lease entitlements without land. This is welcome in that it gives more flexibility to farmers. It is especially important now that the “use it or lose it” rules have tightened. From this year on if a farmer does not submit enough hectares to claim all his/her entitlements in one of any two years they will lose the unclaimed ones to the national reserve. For example, if a farmer owned 40 entitlements but only submitted 35ha in 2016 and 2017 they would lose five entitlements. The only option would be to rent an additional 5ha (even if they didn’t want to), lease them out or sell them. In the old system, the farmer would never lose them due to the rotation of entitlements.
Leasing without land is a useful option. The problem is that the introduction of a 50% clawback on the sale of entitlements without land means it will be abused. It was never meant to facilitate a sofa farmer getting a continuous income from the entitlements and continuing to own them. Active farmers with no entitlements or those who lease in additional land will be forced to hand over between 30% and 70% of the value of entitlements to the owner each year to lease entitlements. In the past they were able to buy the entitlements from one to 2.5 times the value. The large clawback has ensured there will be very few entitlements to be sold. Any farmer thinking of selling is quickly put off when he finds out about the clawback. Most owners are leasing in the hope that the clawback will be removed in future years,
It is important to put the transfer and trading of entitlements in context. According to Department figures (see graphic) the number of entitlements sold when the clawback was introduced in 2006 was just 9,619. However, even when the clawback was taken off, the numbers settled at around 35,000 between 2011 and 2013. That’s just 0.8% of all entitlements. Interestingly, the figure jumped nearly threefold to over 100,000 in 2014. This is because farmers who did not farm in 2013 were forced to sell them. The number of entitlements leased grew steadily from 2006 and reached 76,890 in 2013. That was twice as many as were sold that year, but still just 1.7% of all entitlements. In 2014, the number of entitlements leased dropped to just 26,869 as farmers either sold them or held on to them themselves to increase the value of their pot. The number of entitlements that were transferred by gift of inheritance was between 65,000 and 85,000. There was a jump in 2014 before the changeover to the new system.
The clawback should be reduced and ideally phased out over two years. Otherwise, it just encourages farmers not to sell to the long-term determinant of active farmers.
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